ORDERS:
Arthur E. Gimmy & Buddie A. Johnson, Analysis and Valuation of Golf Courses and Country
Clubs 137-39 (2003).
28.I find that the most reliable approach for determining the market value of these
four golf courses is the capitalized income approach. The golf courses at issue are encumbered
by restrictive covenants that require they be operated as golf courses. The value to a purchaser is
the income that can be derived from the operation of the golf courses.
29.Nonetheless, while I find that Taxpayers clearly established that the Assessor
improperly included the business value of the golf courses in its assessments, Taxpayers failed to
establish credible values for the golf courses in question.
Personal Property and Intangibles
30.The Assessor asserts that all sources of income (and the expenses related thereto)
should be factored into the value of the real property because these businesses typically transfer
at the time the real estate for a golf course is sold. According to the Assessor, the only personal
property that should be segregated from the real estate value is the value of the FF&E (i.e.,
furniture, fixtures, and equipment) that is reported to the county auditor and is subject to a
separate tax on personal property.
31.In addition to tangible personal property—such as goods and inventory, food, and
beverages—personal property can also exist in the form of intangibles. These intangibles may
include specific, identified intangibles, such as intellectual property (e.g., protected service
marks, copyrighted logos, etc.), or unidentified residual intangibles.
32.Although Andy Hinds, an appraiser called as an expert witness by the Assessor,
testified that the assets of these four golf course businesses included intangible personal
property, the Assessor takes the position that all tangible and intangible personal property, with
the exception of FF&E, is inextricably interwoven with the real estate, always transfers at the
same time as the title to the real estate, and should be considered part of the real estate.
Therefore, the Assessor argues, the value of this tangible and intangible personal property, if any
exists, should neither be segregated nor extracted from the overall business value and should be
considered as part of the value of the real estate for ad valorem tax purposes.
33.The Appraisal Institute’s treatise on the appraisal of real estate addresses the
necessity of segregating the value of tangible and intangible personal property in the valuation of
the real estate of a business for ad valorem tax purposes, as follows:
Going concern value includes the incremental value associated with the business
concern, which is distinct from the value of the real property. The value of the
going concern includes an intangible enhancement of the value of the operating
business enterprise, which is produced by the assemblage of the land, buildings,
labor, equipment, and the marketing operation. This assemblage creates an
economically viable business that is expected to continue. The value of the going
concern refers to the total value of the property, including both the real property
and the intangible personal property attributed to business enterprise value (see
Figure 2.2).
It may be difficult to separate the market value of the land and the
building from the total value of the business, but such a division of realty and
non-realty components of value is often required by federal regulations. When an
appraiser cannot effectively separate the market value of the real estate from its
business enterprise value, it is appropriate to state that the reported opinion of
value includes both market value and business enterprise value . . . .
The Appraisal Institute, The Appraisal of Real Estate 27 (12th ed. 2001). The treatise further
explains how the value of a business enterprise should be accounted for in valuing a commercial
property:
Business Enterprise Value
The existence of a residual intangible personal property component in certain
properties has been widely recognized for years. Among the many terms used to
describe this phenomenon, business enterprise value (BEV) is the most widely
used. The issue has attracted attention primarily through assessment,
condemnation, and damage claim assignments, which require that an estimate of
the value of the real estate component be separated from the market value of the
total assets of the business (MVTAB).
These assignments necessarily involve an allocation among the
component parts of real property and tangible and intangible personalty. The
latter can include what has traditionally been called business enterprise value but
more recently has become known as capitalized economic profit (CEP).
. . . .
. . . In the income capitalization approach, because the capitalized income
stream will most likely reflect income to TAB, all components of net operating
income not attributable to the real estate must be removed. The difficulty of these
assignments does not relieve the appraiser of the responsibility to treat the
tangible and intangible personalty properly. Not to do so produces either use
value or the value of TAB; neither is the market value of the fee simple estate in
real property.
Id. at 641, 643-44 (emphasis added).
34.Gimmy and Johnson’s treatise on the valuation of golf courses likewise addresses
the need to separate the value of tangible and intangible personal property from the real estate
when valuing golf courses for ad valorem tax purposes, as follows:
To meet the requirements of accepted appraisal standards, the value of the real
property assets must be segregated from the values of personal property and the
intangible aspects of the ongoing business. The need to segregate value in this
way is determined by the requirements of the assignment. Segregation of the
various components of value is typically required for mortgage financing and
property tax purposes, but is often not necessary for feasibility analyses,
investment decision making, or determining a sale price. It may also be
appropriate to allocate a sale price to reflect various property components and
their associated income tax implications. It is the responsibility of the analyst to
determine when separate values are required and to provide information on these
separate values to the client.
. . . .
. . . To analyze a golf course facility as a business enterprise, the analyst
must recognize that the net operating income from a successful golf course
includes income produced by one or more intangible assets.
Gimmy & Johnson, supra, at 47-48, 49 (emphasis added). Gimmy and Johnson further describe
the valuation problems that result when business value is not segregated from the value of the
real property:
The intangible value of a real estate development operated as a business is, at
times, ignored by real estate appraisers. Even when intangible value exists and
can be independently quantified, real estate appraisers often combine this element
of value with the real property or tangible assets of the project and include it as
part of the value derived in the income capitalization approach. When
comparable sales that include an intangible asset component are used for
comparison, the business value of each sale price is often not segregated or
separately identified, but is included as part of the value of the physical assets.
These practices may be unacceptable and in violation of accepted standards.
. . . .
Obviously, a recreational facility that gets its operating revenues from
golfers is a business activity operating within a real estate environment. A golf
course’s business value component can include a variety of intangible assets and,
if possible, these assets should not be aggregated into a single unit referred to as
goodwill. Intangible assets can include permits and licenses, the golf course’s
name or reputation, customer lists, management systems, management contracts
and covenants not to compete, staff in place, supplier relationships, golf
professional agreements, and tournament contracts.
Id. at 113-14.
35.I find that the businesses of these golf courses whose revenues and expenses were
used by the parties for deriving the value of the real property parcels in question for ad valorem
property tax purposes contain tangible and intangible personal property that add positive value to
these golf course operations. The tangible personal property, aside from the FF&E, would be the
golf carts, the goods and inventory of the pro shops, and the food and beverage operations. The
intangible personal property includes, but is not limited to, the legally protected name and logo
of “The Ocean Course,” international exposure and recognition of the Kiawah Island Golf Resort
through the tournaments, advertising, and other marketing efforts, experienced management, an
assembled capable workforce, the parent owner’s readily available capital, ownership by
affiliated entities that have the financial resources to maintain the courses at the highest level and
to redesign and renovate them, common ownership that allows efficiencies and economies of
scale in the operation and marketing of the Kiawah Island Golf Resort, contractual rights, and
the right of each course to use the name of a famous golf course designer.
36.Each of these courses is a separate property whose value must be derived
separately. The ultimate question is the 2001 market value if these courses were to be sold
separately. All witnesses agreed that if the golf courses were sold as a block of four, separately
from the hotel and villa operations, their market value would be reduced because there would be
no automatic ability to put together golf vacation packages in-house or to market both golf and
lodgings together. The witnesses further agreed that the market value of each golf course would
be diminished if each was sold separately and not as one of four golf courses sold as a package
to a single purchaser. This testimony further corroborates the fact that the present common
business structure and ownership of these four courses, which is not tied to the real estate,
constitutes an intangible whose value is included in the TAB revenues of these courses.
37.In accordance with the excerpts from the publications of the Appraisal Institute, I
find that the value of tangible and intangible personal property should not be included in the
value of the real estate for ad valorem tax purposes.
38.The more difficult question is arriving at a method for valuing these intangibles.
The monograph on the valuation of golf courses sets forth four different approaches that might
be used to derive this value:
Intangible assets can be valued separately through use of the excess profits
technique, analysis of sales of golf course business opportunities, the
residual/segregated value technique, or the management fee technique.
Id. at 114.
39.Mr. Hinds, an expert presented by the Assessor, suggested the management fee
method for measuring intangible value. The management fee approach theoretically provides an
estimate of the intangible value of experienced management and an assembled workforce, but
may not provide a fair estimate of the value of all the intangible personal property assets that are
included within the ongoing business of these four golf courses. This tribunal could not accept
this methodology as the requisite data to support its conclusions were not proffered into
evidence.
40.Robert Kuhlman and James Vernor, Ph. D., the two expert witnesses called by the
Taxpayers, opined that a reasonable and accepted methodology for deriving intangible value was
the Course 800 Method that is taught by the Appraisal Institute for deriving a value for
intangibles from the TAB . Other courts have relied on the Course 800 Method to derive a
figure for intangible value when determining the value of real estate owned by a going
concerned business. Using primarily a form of capitalized income approach, this method
determines the value of the TAB and subtracts from it the value of all the identified business and
real estate components, leaving as the difference a residual figure that is a reasonable estimate of
intangible value.
41.While the Course 800 method may be an accepted methodology, I question the
calculation used in this instance, as the business value derived utilizing this method was
excessive and suspect.
Determination of Value Under the Capitalized Income Approach
42.In determining net operating income for purposes of deriving real property value
for ad valorem tax purposes under the capitalized income approach, the tangible and intangible
personal property, and the income derived therefrom, must be separated from the real property.
Likewise, associated expenses with that income should be removed. In their place should be
substituted the reasonable market rental value for those locations and streams of income.
However, in the instant case, no reliable, cogent statistical evidence was offered in this regard.
43.Although Taxpayers assert that reasonable rental value should be ascribed to all
operations, I find that only those income and expense streams directly attributable to the pro
shop, food and beverage operation, and the cart rental operation should be excluded and have
substituted in their place reasonable market rental.
44.The Assessor argues that the imputed rental figure should represent a market rent
equivalent to that commanded for premium retail and restaurant spaces in downtown Charleston,
in retail centers in Mount Pleasant, or at the Strawmarket, a retail center on Kiawah Island.
Because of the relatively remote location of the golf courses from other retail areas, and the
unique and particularized nature of the retail space in question, I find that the imputed rent
should not be the same as for a premium location in a popular shopping site, but rather, a more
average rate. But, the record is devoid of evidence establishing an average rate. Mr. Kuhlman’s
data asserting an imputed rent is very low and the Assessor did not proffer any documentary
evidence in this regard.
45.The Assessor has included in its determination of the market value of the real
property under the capitalized income approach the income and expenses not only from the real
estate, but also from all tangible and intangible personal property, with the exception of the
FF&E, which the Assessor deducted from the overall value. In other words, the adjusted income
and expenses figures that the Assessor used to determine a net operating income that he
capitalized included the TAB of the golf courses. This approach is inaccurate, necessarily
includes the value of assets other than the real estate, and leads to an inflated real estate value.
CONCLUSIONS OF LAW
Based upon the foregoing Findings of Fact, I conclude the following as a matter of law:
1.The South Carolina Administrative Law Court (ALC) has jurisdiction over this
matter pursuant to S.C. Code Ann. § 12-60-2540(A) (2000).
2.When a tax assessment valuation case reaches the ALC on appeal from a county
board of assessment appeals, the proceeding in front of the ALC is a de novo hearing. Smith v.
Newberry County Assessor, 350 S.C. 572, 577, 567 S.E.2d 501, 504(Ct. App. 2002).
3.“The pertinent date to determine the value of property for a given tax year is
December 31st of the preceding year.” Lindsey v. S.C. Tax Comm’n, 302 S.C. 274, 275 n.1, 395
S.E.2d 184, 185 n.1 (1990) (citing S.C. Code Ann. § 12-37-900 (1976)). The tax year in
question is 2001, and therefore, the relevant date of valuation for the properties at issue is
December 31, 2000.
4.The proper measure of value for ad valorem taxation purposes is the fair market
value. See S.C. Code Ann. § 12-37-930 (Supp. 2004); Lindsey v. S.C. Tax Comm’n, 302 S.C.
504, 397 S.E.2d 930 (1990).
5.S.C. Code Ann. § 12-37-220(A)(10) (2000) provides that, pursuant to S.C. Const.
art. X, § 3, and subject to S.C. Code Ann. § 12-4-720 (2000), “intangible personal property” is
exempt from ad valorem taxation.
6.To arrive at a value for the real estate alone, the value attributable to tangible
personal property and “business value” must be deducted after the net income is capitalized. See
The Appraisal Institute, The Appraisal of Real Estate 412 (10th ed. 1992).
7.For the reasons previously stated, I conclude that the replacement cost approach
and the sales comparison approach should not be used in this case to determine the real estate
value of these four golf courses.
8. I conclude that the most accurate method for valuation of the four golf courses is
the direct capitalization of income approach method. This methodology, as modified to allow
the segregation of the proven value of intangible personal property from the value of the
businesses, was also used by the ALC in determining the value of golf courses in Sea Pines
Plantation Co. v. Beaufort County Assessor, Docket No. 01-ALJ-17-0018-CC (S.C. Admin. Law
Judge Div. June 20, 2002).
9.“The qualification of a witness as an expert in a particular field is within the
sound discretion of the trial judge.” Smoak v. Liebherr-Am., Inc., 281 S.C. 420, 422, 315 S.E.2d
116, 118 (1984); S.C. Dep't of Highways & Pub. Transp. v. Manning, 283 S.C. 394, 398-99, 323
S.E.2d 775, 778 (1984). “Defects in the amount and quality of education or experience go the
weight of the expert's testimony and not its admissibility.” Ott v. Pittman, 320 S.C. 72, 76, 463
S.E.2d 101, 104 (Ct. App. 1995). “[I]f an expert is qualified, the sufficiency of the foundation
for his opinion on value [of real property] is ordinarily a question of weight, not a basis for
excluding the evidence.” City of N. Charleston v. Claxton, 315 S.C. 56, 59, 431 S.E.2d 610, 612
(Ct. App. 1993). “It is not necessary that a witness have the status of a professional appraiser or
dealer in the class of property in question[;] [o]ne who has bought and sold similar property is
competent to give an opinion as to the value of the property, provided, of course, that he is
familiar with that property.” City of Spartanburg v. Laprinakos, 267 S.C. 589, 595, 230 S.E.2d
443, 445 (1976). “Opinion testimony of a non-expert who has sufficient knowledge of the value
of the property in question or who has ample opportunity forming a correct opinion of it is
admissible.” Bakla v. Bakla, 352 S.C. 612, 630, 576 S.E.2d 156, 165 (2003). Therefore,
contrary to the vehement remonstrations of counsel for the Assessor, the opinions of qualified
persons who are not licensed as appraisers may be admitted to establish the value of property.
See, e.g., Boel v. Stewart Title Guaranty Co., 43 P.3d 768 (Idaho 2002) (holding that Idaho’s
Real Estate Appraisers Act, which prohibits a person from giving an opinion as to the value of an
identified piece of real estate unless licensed or certified as an appraiser, did not alter or
contradict the evidentiary rule on expert testimony, and thus, did not preclude a real estate agent,
if properly qualified, from testifying as to the value of property in the course of litigation); State
v. Montgomery Ward Dev. Corp., 719 P.2d 507 (Or. Ct. App. 1986) (concluding that a witness’s
lack of an Oregon real estate license did not preclude him from giving expert testimony as to the
value of property, but rather only went to the weight to be given to his testimony); West
Virginia Div. of Highways v. Butler, 516 S.E.2d 769 (W. Va. 1999) (holding that a witness, who
had been involved in selecting property for a convenience store, could testify as to the value of
the property even though he was not a certified or licensed appraiser under West Virginia’s Real
Estate Licensing and Certification Act).
10.Where the expert's testimony is based upon facts sufficient to form the basis for
an opinion, the trier of fact determines its probative weight. Berkley Elec. Coop. v. S.C. Pub.
Serv. Comm'n, 304 S.C. 15, 20, 402 S.E.2d 674, 677 (1991); Smoak, 281 S.C. at 422, 315 S.E.2d
at 118. A trier of fact is not compelled to accept an expert's testimony, but may give it the weight
and credibility he determines it deserves. Florence County Dep't of Social Servs. v. Ward, 310
S.C. 69, 72-73, 425 S.E.2d 61, 63 (Ct. App. 1992). The trier of fact may also accept the
testimony of one expert over another. S.C. Cable Television Ass’n. v. S. Bell Tel. & Tel. Co.,
308 S.C. 216, 221-22, 417 S.E.2d 586, 589 (1992). As I ruled at the hearing, I conclude that Mr.
Kuhlman, Dr. Vernor, Mr. Hinds, and Ms. Glennon were all qualified to render opinion
testimony as to the methods of valuing the properties in question. The weight that is to be given
the testimony rests with me, the fact finder.11.Courts in South Carolina and other
jurisdictions have routinely relied upon the Appraisal Institute’s standards for the valuation of
real estate. See, e.g., S.C. Tax Comm’n v. S.C. Tax Bd. of Review, 287 S.C. 415, 418 n.2, 339
S.E.2d 131, 132 n.2 (Ct. App. 1985); Lewis v. County of Hennepin, 623 N.W.2d 258, 263
(Minn. 2001); Alpine Country Club v. Borough of Demarest, 807 A.2d 257, 259 (N.J. Super. Ct.
App. Div. 2002).
12.The income capitalization approach is an accepted means for valuing commercial
property. S.C. Tax Comm'n v. S.C. Tax Bd. of Review, 287 S.C. 414, 339 S.E.2d 131 (Ct. App.
1985).
13.The income capitalization approach to valuation is probably the most useful
approach to the market value of fee-play public golf courses, because it looks at property value
through the eyes of a typical investor. See The Appraisal Institute, The Appraisal of Real Estate
409 (10th ed. 1992); see also Reliance Ins. Co. v. Smith, 327 S.C. 528, 531, 489 S.E.2d 674, 675
(Ct. App. 1997). “From an investor’s perspective, the earning power of a real estate investment
is the critical element affecting its value.” The Appraisal Institute, The Appraisal of Real Estate
424 (10th ed. 1992). Investment in an income-producing property represents the exchange of
present dollars for the right to receive future dollars. Id. Additionally, with respect to the
determination of real estate value for golf courses, the sales comparison approach requires a
detailed analysis of numerous variables simply to determine if the courses are fairly comparable
and numerous subjective adjustments to bring the compared courses in line that make it less
reliable than the income approach, especially where a reasonably informed purchaser will be
looking primarily to the income potential of the golf course.
14.To measure property value under the income capitalization approach, two
capitalization techniques are acceptable: direct capitalization and yield capitalization. The
Appraisal Institute, The Appraisal of Real Estate 529-67 (12th ed. 2001). Both sides in these
cases employed the direct capitalization approach. Direct capitalization involves dividing net
operating income by an overall capitalization rate. Id. at 529.
15. The capitalization rate represents the desired yield a purchaser would seek on the
capital investment. See S.C. Tax Comm’n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d
131 (Ct. App. 1985). The rate is extracted from market data and is used in the income approach
to the valuation of property to calculate the present value of anticipated future income. The
Appraisal Institute, The Appraisal of Real Estate 530-31 (12th ed. 2001). In this matter, the
Assessor and the Taxpayers both arrived at a capitalization rate of 10.5% by employing an
overall rate analysis involving a survey of lenders, investors in the market, other courses’
capitalization rates, and data from actual sales.
16. Actual earnings from the real estate are entitled to great consideration in the
valuation of the property for tax purposes. S.C. Tax Comm'n v. S.C. Tax Bd. of Review, 287
S.C. 414, 339 S.E.2d 131 (Ct. App. 1985).
17.Net operating income is the actual or anticipated net income remaining after all
operating expenses are deducted from effective gross income, but before mortgage debt service
and book depreciation are deducted. The Appraisal Institute, The Appraisal of Real Estate 484
(12th ed. 2001).
18. The tangible personal property, the income derived from it, and the expenses
associated with such income, should be separated from the real property.
19.In determining net operating income for purposes of deriving real property value
under the capitalized income approach, the business revenue streams for the pro shop, food and
beverage operations, and the cart rentals, along with their expenses should be removed and
replaced with the imputed rents at the rates previously adopted and determined to be reasonable.
Consequently, I conclude that the allocated common expenses of the Resort should be reduced in
the same proportion as the net revenues excluded.
20.“A taxpayer contesting an assessment has the burden of showing that the
valuation of the taxing authority is incorrect.” Cloyd v. Mabry, 295 S.C. 86, 88, 367 S.E.2d 171,
173 (Ct. App. 1988). While this burden will ordinarily be met by proving the actual value of the
property, the taxpayer may, however, “show by other evidence that the assessing authority’s
valuation is incorrect.” Id. at 89, 367 S.E.2d at 173. And, if the taxpayer makes such a showing,
the assessing authority’s valuation is no longer presumed to be correct and the taxpayer is
entitled to appropriate relief. Id.
21.As the fact finder, an ALJ is not compelled to accept either valuation proposed by
the experts for the opposing sides in a dispute between a taxpayer and a county assessor. Smith
v. Newberry County Assessor, 350 S.C. 572, 578, 567 S.E.2d 501, 504 (Ct. App. 2002).
22.Further, “[a] taxpayer, contesting an assessment that has been made by incorrect
methods, is not bound to be absolutely correct in proposing an alternative figure . . . . [;] [t]he
penalty for being too conservative in one’s own estimate of value should not be forced
acceptance of [the assessor’s] figure.” Georgia-Pacific Corp. v. State Tax Comm’n, 390 P.2d
337, 341 (Or. 1964). Rather, “[o]nce error in the assessment has been shown, the trial court may
decide, if the record contains the necessary evidence, what the correct assessment should have
been.” Id. In Georgia-Pacific, an Oregon case cited with approval by the South Carolina Court
of Appeals in Cloyd v. Mabry, 295 S.C. at 89, 367 S.E.2d at 173, the court further held that,
where the taxpayer has shown an assessor’s valuation to be inaccurate, but has not established an
accurate value itself, a remand for further proceedings before the assessor in order to arrive at a
proper assessment may be appropriate. Georgia-Pacific Corp., 390 P.2d at 342.
23.In the instant matter, the Taxpayers clearly established that the Assessor
erroneously, and against accepted legal and accounting principles, included business value in his
valuation of the subject golf courses for tax purposes. However, the Taxpayers failed to
establish, through reliable, cogent, and competent quantitative evidence, or otherwise, that their
valuation of the subject properties was credible. Nonetheless, as already stated, Taxpayers did
succeed in demonstrating that the Assessor’s valuation of the subject golf courses was erroneous.
Hence, as ascertaining the true fair market value of the subject properties lies at the heart of this
administrative proceeding pursuant to S.C. Code Ann. § 12-37-930 (Supp. 2004), I am
compelled to remand this matter to the Assessor to revalue the subject properties consistent with
the findings contained in the instant Order. While this tribunal is entitled to determine a value
within the range established by the evidence presented, it cannot do so here, as neither the
Assessor nor the Taxpayers offered a documented appraisal or other credible evidence of value
into the record, which would provide this tribunal with sufficient data from which to discern a
reasonable estimate of value. Therefore, the Assessor is ordered to reassess the golf courses in
these cases consistent with the findings of fact and conclusions of law expressed herein.
Specifically, the Assessor’s valuation should exclude tangible and intangible personal property
from the real estate when valuing the golf courses.
ORDER
Based upon the Findings of Fact and Conclusions of Law stated above,
IT IS HEREBY ORDERED that the above-captioned cases are REMANDED to
Respondent Charleston County Assessor for the reassessment of the subject golf courses in
accordance with the findings and conclusions in this Order. Upon completion of this
reassessment upon remand, the parties retain the right to pursue administrative remedies
available at law for any objections they may have to that assessment.
IT IS FURTHER ORDERED that any issues raised in this contested case proceeding,
but not addressed in this Final Order and Decision, are deemed DENIED pursuant to ALC Rule
29(C).
AND IT IS SO ORDERED.
_____________________________
John D. Geathers
Administrative Law Judge
January 18, 2005
Columbia, South Carolina Arthur E. Gimmy & Buddie A. Johnson, Analysis and Valuation of Golf Courses and Country
Clubs 137-39 (2003).
28. I find that the most reliable approach for determining the market value of these
four golf courses is the capitalized income approach. The golf courses at issue are encumbered
by restrictive covenants that require they be operated as golf courses. The value to a purchaser is
the income that can be derived from the operation of the golf courses.
29. Nonetheless, while I find that Taxpayers clearly established that the Assessor
improperly included the business value of the golf courses in its assessments, Taxpayers failed to
establish credible values for the golf courses in question.
Personal Property and Intangibles
30. The Assessor asserts that all sources of income (and the expenses related thereto)
should be factored into the value of the real property because these businesses typically transfer
at the time the real estate for a golf course is sold. According to the Assessor, the only personal
property that should be segregated from the real estate value is the value of the FF&E (i.e.,
furniture, fixtures, and equipment) that is reported to the county auditor and is subject to a
separate tax on personal property.
31. In addition to tangible personal property—such as goods and inventory, food, and
beverages—personal property can also exist in the form of intangibles. These intangibles may
include specific, identified intangibles, such as intellectual property (e.g., protected service
marks, copyrighted logos, etc.), or unidentified residual intangibles.
32. Although Andy Hinds, an appraiser called as an expert witness by the Assessor,
testified that the assets of these four golf course businesses included intangible personal
property, the Assessor takes the position that all tangible and intangible personal property, with
the exception of FF&E, is inextricably interwoven with the real estate, always transfers at the
same time as the title to the real estate, and should be considered part of the real estate.
Therefore, the Assessor argues, the value of this tangible and intangible personal property, if any
exists, should neither be segregated nor extracted from the overall business value and should be
considered as part of the value of the real estate for ad valorem tax purposes.
33. The Appraisal Institute’s treatise on the appraisal of real estate addresses the
necessity of segregating the value of tangible and intangible personal property in the valuation of
the real estate of a business for ad valorem tax purposes, as follows:
Going concern value includes the incremental value associated with the business
concern, which is distinct from the value of the real property. The value of the
going concern includes an intangible enhancement of the value of the operating
business enterprise, which is produced by the assemblage of the land, buildings,
labor, equipment, and the marketing operation. This assemblage creates an
economically viable business that is expected to continue. The value of the going
concern refers to the total value of the property, including both the real property
and the intangible personal property attributed to business enterprise value (see
Figure 2.2).
It may be difficult to separate the market value of the land and the
building from the total value of the business, but such a division of realty and
non-realty components of value is often required by federal regulations. When an
appraiser cannot effectively separate the market value of the real estate from its
business enterprise value, it is appropriate to state that the reported opinion of
value includes both market value and business enterprise value . . . .
The Appraisal Institute, The Appraisal of Real Estate 27 (12th ed. 2001). The treatise further
explains how the value of a business enterprise should be accounted for in valuing a commercial
property:
Business Enterprise Value
The existence of a residual intangible personal property component in certain
properties has been widely recognized for years. Among the many terms used to
describe this phenomenon, business enterprise value (BEV) is the most widely
used. The issue has attracted attention primarily through assessment,
condemnation, and damage claim assignments, which require that an estimate of
the value of the real estate component be separated from the market value of the
total assets of the business (MVTAB).
These assignments necessarily involve an allocation among the
component parts of real property and tangible and intangible personalty. The
latter can include what has traditionally been called business enterprise value but
more recently has become known as capitalized economic profit (CEP).
. . . .
. . . In the income capitalization approach, because the capitalized income
stream will most likely reflect income to TAB, all components of net operating
income not attributable to the real estate must be removed. The difficulty of these
assignments does not relieve the appraiser of the responsibility to treat the
tangible and intangible personalty properly. Not to do so produces either use
value or the value of TAB; neither is the market value of the fee simple estate in
real property.
Id. at 641, 643-44 (emphasis added).
34. Gimmy and Johnson’s treatise on the valuation of golf courses likewise addresses
the need to separate the value of tangible and intangible personal property from the real estate
when valuing golf courses for ad valorem tax purposes, as follows:
To meet the requirements of accepted appraisal standards, the value of the real
property assets must be segregated from the values of personal property and the
intangible aspects of the ongoing business. The need to segregate value in this
way is determined by the requirements of the assignment. Segregation of the
various components of value is typically required for mortgage financing and
property tax purposes, but is often not necessary for feasibility analyses,
investment decision making, or determining a sale price. It may also be
appropriate to allocate a sale price to reflect various property components and
their associated income tax implications. It is the responsibility of the analyst to
determine when separate values are required and to provide information on these
separate values to the client.
. . . .
. . . To analyze a golf course facility as a business enterprise, the analyst
must recognize that the net operating income from a successful golf course
includes income produced by one or more intangible assets.
Gimmy & Johnson, supra, at 47-48, 49 (emphasis added). Gimmy and Johnson further describe
the valuation problems that result when business value is not segregated from the value of the
real property:
The intangible value of a real estate development operated as a business is, at
times, ignored by real estate appraisers. Even when intangible value exists and
can be independently quantified, real estate appraisers often combine this element
of value with the real property or tangible assets of the project and include it as
part of the value derived in the income capitalization approach. When
comparable sales that include an intangible asset component are used for
comparison, the business value of each sale price is often not segregated or
separately identified, but is included as part of the value of the physical assets.
These practices may be unacceptable and in violation of accepted standards.
. . . .
Obviously, a recreational facility that gets its operating revenues from
golfers is a business activity operating within a real estate environment. A golf
course’s business value component can include a variety of intangible assets and,
if possible, these assets should not be aggregated into a single unit referred to as
goodwill. Intangible assets can include permits and licenses, the golf course’s
name or reputation, customer lists, management systems, management contracts
and covenants not to compete, staff in place, supplier relationships, golf
professional agreements, and tournament contracts.
Id. at 113-14.
35. I find that the businesses of these golf courses whose revenues and expenses were
used by the parties for deriving the value of the real property parcels in question for ad valorem
property tax purposes contain tangible and intangible personal property that add positive value to
these golf course operations. The tangible personal property, aside from the FF&E, would be the
golf carts, the goods and inventory of the pro shops, and the food and beverage operations. The
intangible personal property includes, but is not limited to, the legally protected name and logo
of “The Ocean Course,” international exposure and recognition of the Kiawah Island Golf Resort
through the tournaments, advertising, and other marketing efforts, experienced management, an
assembled capable workforce, the parent owner’s readily available capital, ownership by
affiliated entities that have the financial resources to maintain the courses at the highest level and
to redesign and renovate them, common ownership that allows efficiencies and economies of
scale in the operation and marketing of the Kiawah Island Golf Resort, contractual rights, and
the right of each course to use the name of a famous golf course designer.
36. Each of these courses is a separate property whose value must be derived
separately. The ultimate question is the 2001 market value if these courses were to be sold
separately. All witnesses agreed that if the golf courses were sold as a block of four, separately
from the hotel and villa operations, their market value would be reduced because there would be
no automatic ability to put together golf vacation packages in-house or to market both golf and
lodgings together. The witnesses further agreed that the market value of each golf course would
be diminished if each was sold separately and not as one of four golf courses sold as a package
to a single purchaser. This testimony further corroborates the fact that the present common
business structure and ownership of these four courses, which is not tied to the real estate,
constitutes an intangible whose value is included in the TAB revenues of these courses.
37. In accordance with the excerpts from the publications of the Appraisal Institute, I
find that the value of tangible and intangible personal property should not be included in the
value of the real estate for ad valorem tax purposes.
38. The more difficult question is arriving at a method for valuing these intangibles.
The monograph on the valuation of golf courses sets forth four different approaches that might
be used to derive this value:
Intangible assets can be valued separately through use of the excess profits
technique, analysis of sales of golf course business opportunities, the
residual/segregated value technique, or the management fee technique.
Id. at 114.
39. Mr. Hinds, an expert presented by the Assessor, suggested the management fee
method for measuring intangible value. The management fee approach theoretically provides an
estimate of the intangible value of experienced management and an assembled workforce, but
may not provide a fair estimate of the value of all the intangible personal property assets that are
included within the ongoing business of these four golf courses. This tribunal could not accept
this methodology as the requisite data to support its conclusions were not proffered into
evidence.
40. Robert Kuhlman and James Vernor, Ph. D., the two expert witnesses called by the
Taxpayers, opined that a reasonable and accepted methodology for deriving intangible value was
the Course 800 Method that is taught by the Appraisal Institute for deriving a value for
intangibles from the TAB . Other courts have relied on the Course 800 Method to derive a
figure for intangible value when determining the value of real estate owned by a going
concerned business. Using primarily a form of capitalized income approach, this method
determines the value of the TAB and subtracts from it the value of all the identified business and
real estate components, leaving as the difference a residual figure that is a reasonable estimate of
intangible value.
41. While the Course 800 method may be an accepted methodology, I question the
calculation used in this instance, as the business value derived utilizing this method was
excessive and suspect.
Determination of Value Under the Capitalized Income Approach
42. In determining net operating income for purposes of deriving real property value
for ad valorem tax purposes under the capitalized income approach, the tangible and intangible
personal property, and the income derived therefrom, must be separated from the real property.
Likewise, associated expenses with that income should be removed. In their place should be
substituted the reasonable market rental value for those locations and streams of income.
However, in the instant case, no reliable, cogent statistical evidence was offered in this regard.
43. Although Taxpayers assert that reasonable rental value should be ascribed to all
operations, I find that only those income and expense streams directly attributable to the pro
shop, food and beverage operation, and the cart rental operation should be excluded and have
substituted in their place reasonable market rental.
44. The Assessor argues that the imputed rental figure should represent a market rent
equivalent to that commanded for premium retail and restaurant spaces in downtown Charleston,
in retail centers in Mount Pleasant, or at the Strawmarket, a retail center on Kiawah Island.
Because of the relatively remote location of the golf courses from other retail areas, and the
unique and particularized nature of the retail space in question, I find that the imputed rent
should not be the same as for a premium location in a popular shopping site, but rather, a more
average rate. But, the record is devoid of evidence establishing an average rate. Mr. Kuhlman’s
data asserting an imputed rent is very low and the Assessor did not proffer any documentary
evidence in this regard.
45. The Assessor has included in its determination of the market value of the real
property under the capitalized income approach the income and expenses not only from the real
estate, but also from all tangible and intangible personal property, with the exception of the
FF&E, which the Assessor deducted from the overall value. In other words, the adjusted income
and expenses figures that the Assessor used to determine a net operating income that he
capitalized included the TAB of the golf courses. This approach is inaccurate, necessarily
includes the value of assets other than the real estate, and leads to an inflated real estate value.
CONCLUSIONS OF LAW
Based upon the foregoing Findings of Fact, I conclude the following as a matter of law:
1. The South Carolina Administrative Law Court (ALC) has jurisdiction over this
matter pursuant to S.C. Code Ann. § 12-60-2540(A) (2000).
2. When a tax assessment valuation case reaches the ALC on appeal from a county
board of assessment appeals, the proceeding in front of the ALC is a de novo hearing. Smith v.
Newberry County Assessor, 350 S.C. 572, 577, 567 S.E.2d 501, 504 (Ct. App. 2002).
3. “The pertinent date to determine the value of property for a given tax year is
December 31st of the preceding year.” Lindsey v. S.C. Tax Comm’n, 302 S.C. 274, 275 n.1, 395
S.E.2d 184, 185 n.1 (1990) (citing S.C. Code Ann. § 12-37-900 (1976)). The tax year in
question is 2001, and therefore, the relevant date of valuation for the properties at issue is
December 31, 2000.
4. The proper measure of value for ad valorem taxation purposes is the fair market
value. See S.C. Code Ann. § 12-37-930 (Supp. 2004); Lindsey v. S.C. Tax Comm’n, 302 S.C.
504, 397 S.E.2d 930 (1990).
5. S.C. Code Ann. § 12-37-220(A)(10) (2000) provides that, pursuant to S.C. Const.
art. X, § 3, and subject to S.C. Code Ann. § 12-4-720 (2000), “intangible personal property” is
exempt from ad valorem taxation.
6. To arrive at a value for the real estate alone, the value attributable to tangible
personal property and “business value” must be deducted after the net income is capitalized. See
The Appraisal Institute, The Appraisal of Real Estate 412 (10th ed. 1992).
7. For the reasons previously stated, I conclude that the replacement cost approach
and the sales comparison approach should not be used in this case to determine the real estate
value of these four golf courses.
8. I conclude that the most accurate method for valuation of the four golf courses is
the direct capitalization of income approach method. This methodology, as modified to allow
the segregation of the proven value of intangible personal property from the value of the
businesses, was also used by the ALC in determining the value of golf courses in Sea Pines
Plantation Co. v. Beaufort County Assessor, Docket No. 01-ALJ-17-0018-CC (S.C. Admin. Law
Judge Div. June 20, 2002).
9. “The qualification of a witness as an expert in a particular field is within the
sound discretion of the trial judge.” Smoak v. Liebherr-Am., Inc., 281 S.C. 420, 422, 315 S.E.2d
116, 118 (1984); S.C. Dep't of Highways & Pub. Transp. v. Manning, 283 S.C. 394, 398-99, 323
S.E.2d 775, 778 (1984). “Defects in the amount and quality of education or experience go the
weight of the expert's testimony and not its admissibility.” Ott v. Pittman, 320 S.C. 72, 76, 463
S.E.2d 101, 104 (Ct. App. 1995). “[I]f an expert is qualified, the sufficiency of the foundation
for his opinion on value [of real property] is ordinarily a question of weight, not a basis for
excluding the evidence.” City of N. Charleston v. Claxton, 315 S.C. 56, 59, 431 S.E.2d 610, 612
(Ct. App. 1993). “It is not necessary that a witness have the status of a professional appraiser or
dealer in the class of property in question[;] [o]ne who has bought and sold similar property is
competent to give an opinion as to the value of the property, provided, of course, that he is
familiar with that property.” City of Spartanburg v. Laprinakos, 267 S.C. 589, 595, 230 S.E.2d
443, 445 (1976). “Opinion testimony of a non-expert who has sufficient knowledge of the value
of the property in question or who has ample opportunity forming a correct opinion of it is
admissible.” Bakla v. Bakla, 352 S.C. 612, 630, 576 S.E.2d 156, 165 (2003). Therefore,
contrary to the vehement remonstrations of counsel for the Assessor, the opinions of qualified
persons who are not licensed as appraisers may be admitted to establish the value of property.
See, e.g., Boel v. Stewart Title Guaranty Co., 43 P.3d 768 (Idaho 2002) (holding that Idaho’s
Real Estate Appraisers Act, which prohibits a person from giving an opinion as to the value of an
identified piece of real estate unless licensed or certified as an appraiser, did not alter or
contradict the evidentiary rule on expert testimony, and thus, did not preclude a real estate agent,
if properly qualified, from testifying as to the value of property in the course of litigation); State
v. Montgomery Ward Dev. Corp., 719 P.2d 507 (Or. Ct. App. 1986) (concluding that a witness’s
lack of an Oregon real estate license did not preclude him from giving expert testimony as to the
value of property, but rather only went to the weight to be given to his testimony); West
Virginia Div. of Highways v. Butler, 516 S.E.2d 769 (W. Va. 1999) (holding that a witness, who
had been involved in selecting property for a convenience store, could testify as to the value of
the property even though he was not a certified or licensed appraiser under West Virginia’s Real
Estate Licensing and Certification Act).
10. Where the expert's testimony is based upon facts sufficient to form the basis for
an opinion, the trier of fact determines its probative weight. Berkley Elec. Coop. v. S.C. Pub.
Serv. Comm'n, 304 S.C. 15, 20, 402 S.E.2d 674, 677 (1991); Smoak, 281 S.C. at 422, 315 S.E.2d
at 118. A trier of fact is not compelled to accept an expert's testimony, but may give it the weight
and credibility he determines it deserves. Florence County Dep't of Social Servs. v. Ward, 310
S.C. 69, 72-73, 425 S.E.2d 61, 63 (Ct. App. 1992). The trier of fact may also accept the
testimony of one expert over another. S.C. Cable Television Ass’n. v. S. Bell Tel. & Tel. Co.,
308 S.C. 216, 221-22, 417 S.E.2d 586, 589 (1992). As I ruled at the hearing, I conclude that Mr.
Kuhlman, Dr. Vernor, Mr. Hinds, and Ms. Glennon were all qualified to render opinion
testimony as to the methods of valuing the properties in question. The weight that is to be given
the testimony rests with me, the fact finder. 11. Courts in South Carolina and other
jurisdictions have routinely relied upon the Appraisal Institute’s standards for the valuation of
real estate. See, e.g., S.C. Tax Comm’n v. S.C. Tax Bd. of Review, 287 S.C. 415, 418 n.2, 339
S.E.2d 131, 132 n.2 (Ct. App. 1985); Lewis v. County of Hennepin, 623 N.W.2d 258, 263
(Minn. 2001); Alpine Country Club v. Borough of Demarest, 807 A.2d 257, 259 (N.J. Super. Ct.
App. Div. 2002).
12. The income capitalization approach is an accepted means for valuing commercial
property. S.C. Tax Comm'n v. S.C. Tax Bd. of Review, 287 S.C. 414, 339 S.E.2d 131 (Ct. App.
1985).
13. The income capitalization approach to valuation is probably the most useful
approach to the market value of fee-play public golf courses, because it looks at property value
through the eyes of a typical investor. See The Appraisal Institute, The Appraisal of Real Estate
409 (10th ed. 1992); see also Reliance Ins. Co. v. Smith, 327 S.C. 528, 531, 489 S.E.2d 674, 675
(Ct. App. 1997). “From an investor’s perspective, the earning power of a real estate investment
is the critical element affecting its value.” The Appraisal Institute, The Appraisal of Real Estate
424 (10th ed. 1992). Investment in an income-producing property represents the exchange of
present dollars for the right to receive future dollars. Id. Additionally, with respect to the
determination of real estate value for golf courses, the sales comparison approach requires a
detailed analysis of numerous variables simply to determine if the courses are fairly comparable
and numerous subjective adjustments to bring the compared courses in line that make it less
reliable than the income approach, especially where a reasonably informed purchaser will be
looking primarily to the income potential of the golf course.
14. To measure property value under the income capitalization approach, two
capitalization techniques are acceptable: direct capitalization and yield capitalization. The
Appraisal Institute, The Appraisal of Real Estate 529-67 (12th ed. 2001). Both sides in these
cases employed the direct capitalization approach. Direct capitalization involves dividing net
operating income by an overall capitalization rate. Id. at 529.
15. The capitalization rate represents the desired yield a purchaser would seek on the
capital investment. See S.C. Tax Comm’n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d
131 (Ct. App. 1985). The rate is extracted from market data and is used in the income approach
to the valuation of property to calculate the present value of anticipated future income. The
Appraisal Institute, The Appraisal of Real Estate 530-31 (12th ed. 2001). In this matter, the
Assessor and the Taxpayers both arrived at a capitalization rate of 10.5% by employing an
overall rate analysis involving a survey of lenders, investors in the market, other courses’
capitalization rates, and data from actual sales.
16. Actual earnings from the real estate are entitled to great consideration in the
valuation of the property for tax purposes. S.C. Tax Comm'n v. S.C. Tax Bd. of Review, 287
S.C. 414, 339 S.E.2d 131 (Ct. App. 1985).
17. Net operating income is the actual or anticipated net income remaining after all
operating expenses are deducted from effective gross income, but before mortgage debt service
and book depreciation are deducted. The Appraisal Institute, The Appraisal of Real Estate 484
(12th ed. 2001).
18. The tangible personal property, the income derived from it, and the expenses
associated with such income, should be separated from the real property.
19. In determining net operating income for purposes of deriving real property value
under the capitalized income approach, the business revenue streams for the pro shop, food and
beverage operations, and the cart rentals, along with their expenses should be removed and
replaced with the imputed rents at the rates previously adopted and determined to be reasonable.
Consequently, I conclude that the allocated common expenses of the Resort should be reduced in
the same proportion as the net revenues excluded.
20. “A taxpayer contesting an assessment has the burden of showing that the
valuation of the taxing authority is incorrect.” Cloyd v. Mabry, 295 S.C. 86, 88, 367 S.E.2d 171,
173 (Ct. App. 1988). While this burden will ordinarily be met by proving the actual value of the
property, the taxpayer may, however, “show by other evidence that the assessing authority’s
valuation is incorrect.” Id. at 89, 367 S.E.2d at 173. And, if the taxpayer makes such a showing,
the assessing authority’s valuation is no longer presumed to be correct and the taxpayer is
entitled to appropriate relief. Id.
21. As the fact finder, an ALJ is not compelled to accept either valuation proposed by
the experts for the opposing sides in a dispute between a taxpayer and a county assessor. Smith
v. Newberry County Assessor, 350 S.C. 572, 578, 567 S.E.2d 501, 504 (Ct. App. 2002).
22. Further, “[a] taxpayer, contesting an assessment that has been made by incorrect
methods, is not bound to be absolutely correct in proposing an alternative figure . . . . [;] [t]he
penalty for being too conservative in one’s own estimate of value should not be forced
acceptance of [the assessor’s] figure.” Georgia-Pacific Corp. v. State Tax Comm’n, 390 P.2d
337, 341 (Or. 1964). Rather, “[o]nce error in the assessment has been shown, the trial court may
decide, if the record contains the necessary evidence, what the correct assessment should have
been.” Id. In Georgia-Pacific, an Oregon case cited with approval by the South Carolina Court
of Appeals in Cloyd v. Mabry, 295 S.C. at 89, 367 S.E.2d at 173, the court further held that,
where the taxpayer has shown an assessor’s valuation to be inaccurate, but has not established an
accurate value itself, a remand for further proceedings before the assessor in order to arrive at a
proper assessment may be appropriate. Georgia-Pacific Corp., 390 P.2d at 342.
23. In the instant matter, the Taxpayers clearly established that the Assessor
erroneously, and against accepted legal and accounting principles, included business value in his
valuation of the subject golf courses for tax purposes. However, the Taxpayers failed to
establish, through reliable, cogent, and competent quantitative evidence, or otherwise, that their
valuation of the subject properties was credible. Nonetheless, as already stated, Taxpayers did
succeed in demonstrating that the Assessor’s valuation of the subject golf courses was erroneous.
Hence, as ascertaining the true fair market value of the subject properties lies at the heart of this
administrative proceeding pursuant to S.C. Code Ann. § 12-37-930 (Supp. 2004), I am
compelled to remand this matter to the Assessor to revalue the subject properties consistent with
the findings contained in the instant Order. While this tribunal is entitled to determine a value
within the range established by the evidence presented, it cannot do so here, as neither the
Assessor nor the Taxpayers offered a documented appraisal or other credible evidence of value
into the record, which would provide this tribunal with sufficient data from which to discern a
reasonable estimate of value. Therefore, the Assessor is ordered to reassess the golf courses in
these cases consistent with the findings of fact and conclusions of law expressed herein.
Specifically, the Assessor’s valuation should exclude tangible and intangible personal property
from the real estate when valuing the golf courses.
ORDER
Based upon the Findings of Fact and Conclusions of Law stated above,
IT IS HEREBY ORDERED that the above-captioned cases are REMANDED to
Respondent Charleston County Assessor for the reassessment of the subject golf courses in
accordance with the findings and conclusions in this Order. Upon completion of this
reassessment upon remand, the parties retain the right to pursue administrative remedies
available at law for any objections they may have to that assessment.
IT IS FURTHER ORDERED that any issues raised in this contested case proceeding,
but not addressed in this Final Order and Decision, are deemed DENIED pursuant to ALC Rule
29(C).
AND IT IS SO ORDERED.
_____________________________
John D. Geathers
Administrative Law Judge
January 18, 2005
Columbia, South Carolina |